Public Bill Committee



(Morning)

[Mr Edward Leigh in the Chair]
Written evidence to be reported to the House
EN 05 National Energy Action
EN 07 IPPR
EN 10 E.ON
EN 11 Energy UK
EN 12 Vattenfall
EN 13 Professor Catherine Mitchell
EN 14 WWF
EN 15 RenewableUK
EN 16 Combined Heat and Power Association
EN 17 EDF Energy
EN 18 Consumer Focus

The Committee deliberated in private.

Examination of Witness

Dr David Kennedy gave evidence.

Edward Leigh: Dr Kennedy, will you introduce yourself, just for the sake of the record? Please say who you are and what you do, so it is all written down for Hansard.

Dr Kennedy:  Good morning, everybody. My name is David Kennedy. I am the chief executive of the Committee on Climate Change.

Q 261261

Edward Leigh: Thank you very much.
I remind Members that questions must be limited to matters within the scope of the Bill, and we must stick strictly to the timings of the programme motion, which the Committee has agreed. So just keep an eye on the clock, please. We do not want to have to interrupt people mid-sentence.
Dr Kennedy, I do not know how many Members will want to ask you questions, but I suspect there may be quite a few, so if you could try to keep your answers as brief as you possibly can we would be very grateful, subject—of course—to your covering the ground.
We will go through broad headings, and Members will just come in as they wish. We will start with the need for electricity market reform.

Q 262

Tom Greatrex: Good morning, Dr Kennedy. I know that you have indicated previously the importance of electricity market reform in delivering a decarbonised power sector. Regarding the content of the Bill, as you have looked at it, where do you think there are areas that still require improvement following on from the changes since the pre-legislative scrutiny?

Dr Kennedy:  The quick answer to that is, first, my Committee has been very clear during the last five years that electricity sector decarbonisation is both a very sensible thing to do, from an economic perspective, and required under the Climate Change Act 2008, to meet the 2050 target. Then you are right—electricity market reform is required to support electricity sector decarbonisation. We would not expect to achieve that decarbonisation, and certainly we would not expect to achieve it at a cost that is affordable to the consumer, without the electricity market reforms. So those issues are very important.
The fundamental aspect of the Bill is the introduction of long-term contracts that provide revenue certainty to investors who have to put in very large amounts of money in sunk costs. We agree with that. We think that is the right model, as opposed to, for example, extending the renewables obligation we have at the moment to low-carbon technologies.
The big question for us is about the investment environment that the Bill will create. Contracts for difference certainly improve the investment climate; they give you bankable, specific projects. But there is a broader question about the direction of travel in the power sector, which is highly uncertain at the moment. The Climate Change Act 2008 says that we should be moving to an early decarbonisation of the power sector, and there is a commitment to 2020 funding to meet the European renewable energy target. But beyond 2020, that has been thrown up in the air. The Government’s gas generation strategy contains a scenario—it is the Treasury’s scenario—where we stop investing in low carbon after 2020. That would be a silly thing to do, but it is in the gas generation strategy. I think that has undermined investment in the climate.
I am worried about supply chain investment and project development beyond 2020. I am also worried about investment in unabated gas-fired generation. We need some investment to keep the lights on, but it is hard to see how that will come forward short of having the capacity mechanism. My concerns are not about the contracts for difference. There are issues about contract design, but we do not need legislation for that. It is for the Government to negotiate that with investors. There are issues about the broader investment climate.

Edward Leigh: Can I stop you there, because there are other questions? Is there a supplementary?

Q 263

Tom Greatrex: On the point that you were making about decarbonisation, Dr Kennedy, I know your position is that there should be a decarbonisation target. Is your view that without that target we would not be able to achieve what your organisation says we need to achieve in terms of energy change in the UK?

Dr Kennedy:  It makes it more difficult and potentially a lot more expensive. There has been a commitment of £7.6 billion for 2020 under the levy control framework. But if we did not have a competitive supply chain, I would be worried about, for example, the cost of offshore wind turbines, which could be as high as £140 per MWh. If we have a competitive supply chain, that could go down to £100 per MWh. Why do we not go the extra mile and say, “Okay, we have committed all that money, so let’s also make a commitment that brings in the investment that drives down the costs”?

Q 264

John Hayes: Two points, if I may. First, you will know that we changed the arrangements to make access to CFDs easier for renewables. Why do you feel that was important? That argument was put out by many when the draft Bill was published.

Edward Leigh: I think we ought to stick to one question, otherwise it gets complicated.

Dr Kennedy:  It is important that CFDs are a good fit for all of the low-carbon technologies. It is crucial that we develop a portfolio, which should include renewables, nuclear and carbon capture and storage for gas and coal. Certainly, the way things are looking in the Bill, we have the potential to sign CFDs, which will bring forward those investments. But as I said, it is about the broader investment climate. Are people going to put money into business development so they are there ready to sign the contracts? Are the supply chain companies going to build the wind turbine factories? That is a big question and a big risk.

Q 265

John Hayes: On the issue of the levy control framework, you mentioned the figure of £7.6 billion. That presumably gives businesses a chance to plan strategically because of the clarity and certainty it establishes. Again, why is it so important?

Dr Kennedy:  It is important that we have the funding to bring through the investments we need over the next few years. It is a very positive thing. We think that £7.6 billion is about the right level for 2020. The problem is that it applies only to projects that come on the system before 2020. Given the very long lead times to bring those projects forward beyond 2020 and the long payback periods for investment in the supply chain, we need to know more than what will happen over the next seven or eight years. We need some confidence about the direction of travel through the 2020s, and at the moment we do not have that confidence.

Q 266

John Hayes: And that is why consensus is so important. If we can get consensus across the House on the Bill and the strategy in general, we will add to the certainty you just described.

Dr Kennedy:  I think so. We need consensus on the direction of travel for the power sector, and we do not have it from the Government at the moment. The gas generation strategy’s ways of developing the power sector are the polar opposite. As long as that is the case and as long as the Government cannot agree, you will not give the right signal to investors.

Q 267

Peter Aldous: We heard on Tuesday about the importance of timeliness and getting on with it for utility companies and investors, as time is of the essence. Do you agree with that, and are there any particular timelines that you think we should be hitting?

Dr Kennedy:  Well, it is very important that we get on and start making investments rather than talking about them, which is what we have done for the past few years. The project pipeline is reasonably healthy if you look across all the low-carbon technologies: renewables, CCS and nuclear. In terms of key actions, if you look at nuclear, we need to enter into a contract, if we can agree a price with EDF that is appropriate for the consumer. On CCS, we need to move forward with the demonstration projects, and on renewables, again, we need to move forward, and particularly to get investments moving forward, in offshore wind.

Q 268

Dan Byles: Dr Kennedy, you said that there is uncertainty about the direction of travel. We have one of the toughest 2050 emission reduction targets in the world. We have the carbon budget, which effectively gives a 50% emission reduction target by 2027. Surely our direction of travel is not only clear but one of the most robust in the developed world.

Dr Kennedy:  Look, if everybody thought that the Climate Change Act was going to be binding on the Government’s approach to the power sector, I would agree with you. I do not think that that is the case, and I do not think it has been helped by, for example, the gas generation strategy, which presents a scenario that is, as far as I am concerned, incompatible with the Climate Change Act. Investors say, “I know what the Climate Change Act says, but I also hear what the Government say, and the Government are holding the purse strings here, particularly the Treasury, so what am I supposed to make of those competing forces at work?”

Q 269

Dan Byles: You keep saying “investors”. We on the Select Committee have spoken to a lot of investors, and they do not necessarily say the same thing. Only on Tuesday, National Grid, E.ON, Centrica and Scottish Power all agreed with me when I asked whether they agreed with previous witnesses who said, “For God’s sake, don’t delay the Energy Bill with arguing over the 2030 target. The important thing is the contracts for difference, the levy control framework, nuts and bolts.” I said, “Do you all broadly agree?” They all said yes.

Dr Kennedy:  You have to differentiate between the energy companies and the supply chain companies. I think if you ask the supply chain companies, they will tell you that they need a lot more confidence than they have at the moment. We cannot decarbonise without a supply chain in this country, but we should not want to—

Q 270

Dan Byles: But certainly the supply chain—

Edward Leigh: We are not going to have people talking over each other. Let him answer.

Dr Kennedy:  I differentiate that. The other thing is that the levy control framework gives confidence to the energy companies that want to get on and bring forward, particularly, investments in renewables to meet the 2020 target, but we will quite quickly hit a period in three years’ time when they will want to develop projects that will come on the system after 2020. They will not do that unless they have confidence that there will be a market. They are focusing on getting on with it now, but as I said, within the next two or three years, we will need more confidence than we have at the moment. That is why a carbon intensity target could be useful.

Q 271

Alan Whitehead: Following that, what impact do you think might arise from the proposals in the Bill to introduce a capacity market, and how do you think that arrangement might be compatible with those climate change targets? How might delivery arrangements best be aligned with what the Committee on Climate Change is saying about emission levels and how the gas market might align with that, or indeed bust it if other routes are adopted?

Dr Kennedy:  We have got to be clear: we need unabated gas-fired capacity coming on the system, and if it does not come on the system, the lights will go out at some point in future. We need that investment.
You asked whether it will come forward under the current market arrangements. I have to say that I am pretty worried about whether it will. In the investment climate—if you look at the system, it has increasing amounts of intermittent generation in the 2020s—you would not want to invest in unabated gas-fired generation to put it into that market. That takes me towards saying that you need something to support the investment. Capacity markets are standard around the world. We do not have them in this country, but we have them elsewhere around the world. They are pretty commonplace.
On a personal level—we do not have an official committee view on the capacity mechanism—my own view is that we should be seriously considering accelerating that and putting it in place now, so that we are confident that the gas will come on the system. In order that gas does not dominate the system, we need to make sure that the investment climate for low-carbon technologies is conducive, and if we have that good investment climate, those two things together—the low carbon coming on to the system and the unabated gas—will give us a system that both keeps down our emissions and gives us the security of supply that we need.

Q 272

Alan Whitehead: But unabated gas has been grandfathered, has it not, in terms of what comes on to the system?

Dr Kennedy:  Yes. I am more relaxed about that. We will need unabated gas for the foreseeable future. It is not sensible to say, “Invest in unabated gas, but we will make you take it off the system at some point in the future.” We will need it well into the 2030s and 2040s. The point is that we do not want lots of gas-fired generation, but we want the capacity there, able to generate. In those circumstances, it does not make sense to me to say, “We are going to take it off the system at some point in the future.”

Q 273

Gregory Barker: I am surprised to hear you say that, actually. If you are looking into the 2020s and beyond, it is not a choice between unabated gas or not. The choice is about whether we have a progressive emissions performance standard. Although we clearly do not have the technology at the scale required to deploy carbon capture and storage at the moment or to be able to say clearly now what the CCS project will be able to deliver, that is clearly where we have to get to in the next decade. I am surprised that you seem to be positing an all-or-nothing-at-all scenario, and not including the emissions performance standard in your thoughts about the signals that we are sending to the industry and investors, in terms of the choice between a gas strategy and support for renewables and the need for a decarbonisation target.

Dr Kennedy:  For me, the EPS is the wrong instrument, then. We are clear that, in 2030, for example, we should be aiming for about 5% to 10% unabated gas-fired generation; after that, maybe it will decline. An EPS that takes all unabated gas-fired generation off the system would not allow you to balance the system. What you might look at instead is limiting the running hours, over time, of unabated gas-fired generation.

Q 274

Gregory Barker: That is not right, though, is it? If gas were running with CCS, you could have lots of it.

Dr Kennedy:  If gas were running with CCS; at the moment we do not know if it will be able to run with CCS or what the economics are.

Gregory Barker: I just said that.

Edward Leigh: Do not talk over each other, because Hansard cannot cope.

Q 275

Gregory Barker: I prefaced my comments with that. The whole point is that that is why we are investing over £1 billion in carbon capture and storage.

Dr Kennedy:  Until we know that CCS is viable, you should not go setting standards that require the deployment of CCS.

Q 276

Gregory Barker: That was what I just said. That was my question.

Dr Kennedy:  Then I agree with you: do not set a standard that anticipates the use of CCS until we know it works. If that is what you said, I agree with you.

Q 277

Gregory Barker: We can make some assumptions about the need to drive development. There are lots of things that we do not know right now in detail: for example, we do not know about the efficiency of a whole range of technologies and how they can be deployed at scale. However, we are making assumptions and setting out a level of ambition. I am surprised that you are not supportive of an emissions performance standard, yet you are very clear in your support of a decarbonisation target which I do not remember being part of the discussion during the proceedings on the Climate Change Act.

Q 278

Edward Leigh: Okay, that is enough—questions, not speeches.

Dr Kennedy:  I do not think that you can set a legally binding emissions performance standard that assumes that CCS will be successful before we know it to be successful. I think we have the right approach at the moment in supporting the demonstration of that potentially crucial technology. I hope it works, and I think that if we move quickly now, by 2018 we will find out a lot more about whether it will be viable or not. At that point you might want to set an emissions performance standard.

Barry Gardiner: The Committee has received written evidence that demonstrates concern that the growth of the levy control framework up to 2020 and beyond will not be adequate to support the required level of renewables energy deployment. What steps could be taken at this stage, and perhaps in secondary legislation, to allay those concerns, and would you—

Q 279

Edward Leigh: All right, start with that, and then you can ask another.

Dr Kennedy:  Our analysis says that the levy control framework in 2020 is about the right level to support all of the investments, not only in renewables but in CCS demonstration and nuclear, that we want coming on to the system. There is a question about the funding for what happens on those projects after 2020. For me, given that direction of travel, it is the carbon intensity target, which feeds through then to the delivery plan and the funding that you get to implement that delivery plan. If anything, I would put some more details about the delivery plan itself in the primary legislation, including that the delivery plan has to be implemented, it has to achieve the 2050 target on carbon budgets—that has to be implemented—and, the consequence of it having to be implemented, that it has to be funded as well.
The increment funding after 2020 becomes pretty small. A lot of the pain in the decarbonisation is out to 2020, and not after that. That is an important thing to bear in mind.

Q 280

Barry Gardiner: In relation to the delivery arrangements for contracts for difference, would you wish to see a role for the Committee on Climate Change in that?

Dr Kennedy:  I would say not in terms of specific contracts, which are for the Government to negotiate. We will take a view on the delivery plan itself. We will take a view on how many contracts the Government should be seeking to enter into and the type of prices that would bring forward the investments that we need. That is something that we will do as part of our annual reporting on progress, anyway.
People have said that we should have a statutory role in terms of being consulted on the delivery plan. That is probably sensible, because it would be unfortunate if a delivery plan were to go forward without our having sight of it or commenting on it and then for us to come after the event and say, “Hang on. This is inconsistent with the 2050 target.” So I think our early participation, possibly underpinned by a role as a statutory consultee, could be helpful in making things move forward in a sensible way.

Edward Leigh: We are now running out of time and a lot of people are trying to catch my eye. Let us have a quick question and a quick answer.

Q 281

Barry Gardiner: You said that it would be helpful to have intensity targets in the Bill. The Government have said that, because of the timing of the carbon budget, they do not wish to do that and pre-empt the fifth carbon budget. Would you be in favour of an intensity target for 2027, which would bring it back within the ambit of the fourth budget?

Dr Kennedy:  Possibly. I think the argument about not having set the fifth carbon budget is not valid in this context. Power sector decarbonisation is not related to a specific carbon budget; it is a consequence of the 2050 target. The Government have accepted that, so they have early power sector decarbonisation built into their carbon plan on the path to a 2050 target. As for putting the carbon intensity target in the Bill, you get a bit more flexibility, and that may be sensible, because of uncertainty. You get a bit more flexibility if you put it in secondary legislation. To put something about the direction of travel beyond 2020 would be very helpful in the current circumstances, with the high degree of uncertainty.

Q 282

Mel Stride: If we had a 2030 target in the Bill, do you recognise that there might be some inconsistency between that target and the levy control framework? I will quote evidence that we heard on Tuesday from Dieter Helm. He said that
“if you put a 2030 target on the face of the Bill, the levy control mechanism may turn out to be inconsistent with that target. There would then be a question about which has primacy. That creates a difficult, complex component of the Bill.”––[Official Report, Energy Public Bill Committee, 15 January 2013; c. 71, Q216.]

Dr Kennedy:  I have been asked about this before by the Select Committee. My view is that we have a Climate Change Act that requires policies in place that are funded to meet the 2050 target, so power sector decarbonisation, which is already in that legislation, should have primacy over the levy control framework, which should accommodate that piece of law, unless we change the Climate Change Act. If you put a similar reinforcing commitment in this piece of legislation, again that would take precedence over the levy control framework. But we are in that situation, anyway, with the Climate Change Act.

Q 283

Mel Stride: The Government are most anxious that we reduce bills as much as possible for consumers. Do you recognise that there is at least some danger that the restrictions of a 2030 target could lead to higher bills for consumers?

Dr Kennedy:  It depends on how you design it. What you have to do is find a balance between providing certainty to investors, particularly to supply chain investors, and then have flexibility to respond to unforeseen circumstances. You do not want to write a blank cheque to the industry. Let us be clear about that. It cannot be decarbonisation at all costs. That is why you design a target to allow you to relax the ambition, for example, if costs do not come down as we currently think that they will.
Again, it is important. Most of the price increase due to power sector carbonisation that we have already committed occurs because of the £7.6 billion in 2020. The consequence of that is about £100 on the typical household bill. If you go beyond 2020, you get similar increases whether you decarbonise the power system or whether you have a dash for gas. That gas-fired generation is subject to a carbon penalty under the Treasury and the Government’s carbon price underpin, so the price impacts beyond 2020 are the same whether you have a gas-based system or low carbon. It is a false debate to ask what is the impact on consumers of the 2030 target. We have already committed to that consumer impact through the levy control framework.

Q 284

Luciana Berger: I listened to your concerns about whether an EPS is the right instrument. On the basis that we have it, do you believe that the level of 450 grams of carbon dioxide per kWh is an appropriate level? On the back of that, what is your assessment of our ability to meet our long-term climate change targets as a result of this Bill?

Dr Kennedy:  Do I think that that is the right level? At that level it does not do a lot, obviously, because it is set at a level to allow gas-fired generation to continue in unabated form without CCS or coming off the system. Maybe at the moment, given that we are not totally confident about CCS, that flexibility is a sensible thing to retain.
On whether the Energy Bill helps us to achieve our longer-term objectives, I think that it absolutely does, because power sector decarbonisation is right at the heart of economy-wide decarbonisation, and the Bill certainly takes some very positive steps towards supporting that. Without this Bill, you would not get power sector decarbonisation. I think that we could go further—a carbon intensity target would be very helpful. It would keep costs down by managing the risks for investors, and that would be good for consumers. However, there is a lot of good stuff in the Bill and I would not want to be seen to be negative about it. Adding on a bit more confidence for investors will give a lot of bang for the buck around something that is already a very good piece of legislation.

Q 285

Luciana Berger: One of the things missing from the Bill is elements of demand reduction, the importance of which your Committee has spoken about at great length. What amendments or additions would you like to see to address demand reduction in the UK?

Dr Kennedy:  Clearly, there is a lot of potential for demand-side reduction in the electricity sector. There is good evidence on that. There is a question over how much potential there is, but you can reveal that through the market. There is an open question as to whether we should be tapping into that through the electricity market reform, through our products policies, or through the whole suite of approaches to demand-side reduction. As I said, that is an open question, so we are open-minded as to whether that should come into the electricity market reform or there should be other policies that deal with it.

Edward Leigh: Okay, stop there. We have four minutes left and we have two more people who want to come in. We are going to start with Mike Weir and then go to Sir Robert Smith, who have not asked a question. They can divide up the time between them.

Q 286

Michael Weir: You mentioned earlier that CFDs were a better instrument than the renewables obligation. However, given the time scale of investment, are you satisfied that investors are confident enough in CFDs to allow the renewables obligation to be closed in 2017?

Dr Kennedy:  You will have heard what investors have to say on that. At the moment, you cannot say that you are confident in CFDs because we have not seen one. We have a high-level framework at the moment, and, very quickly, because I was asked about the pressing things, we have got to go from the high level to a detailed implementing framework. That is still possible. We can get CFDs up and running in order to have a nice transition from the renewables obligation. Will we do it? That is the challenge for the Government. If we were not able to do it, we would have to think again and run the renewables obligation in parallel with the CFDs for a year or two. However, we should not jump to that now; we should try to get the CFDs right, and, as far as I understand it, that is the Government’s focus at the moment.

Q 287

Robert Smith: So it is definitely important that we get the Bill through quickly in order to get on to the next stage and make sure that the CFDs deliver. On a more detailed point, do you have concerns about how independents and smaller generators will be able to access the CFD market?

Dr Kennedy:  Certainly, those concerns have been raised by the small investors. It is important that they can access the market. Whether the most recent draft of the Bill has been designed in a way that eases those concerns is for them to come and say before the Committee, but it is important that they have access to the market.

Edward Leigh: I think Peter Aldous wanted to ask a question.

Peter Aldous: Both of my questions have been asked.

Q 288

Dan Byles: May I ask one very quickly, if we have 30 seconds? No other country has a 2030 decarbonisation target, so where are these supply chain companies going to get the security that we are now giving them?

Dr Kennedy:  There are certainly more positive messages coming out of France and Germany for offshore wind, for example, and in this country beyond 2020, so those are two potential markets.

Q 289

Dan Byles: But they manage that without a 2030 decarbonisation target. There are other ways of doing it.

Dr Kennedy:  If we had not destroyed the investment climate in this country by the Government giving mixed messages about what they think about the future for the power system, maybe we would not need it, but, because we have those mixed messages and we are where we are, I think that the supply chain will be looking at France and Germany. We can buy offshore wind turbines from France and Germany rather than have them here, but that is not good for us. We lose the high-value jobs and do not have the competitive supply chain in the country.

Dan Byles: That is not the core purpose of the Bill, of course.

Q 290

Robert Buckland: “Destroyed the investment community”—are you sure that you meant to use those words?

Dr Kennedy:  I said, “destroyed the investment climate”, not the investment community. I have said that there are very mixed messages coming from the Government, and that is very unhelpful for the investment climate.

Q 291

Robert Buckland: Destroyed?

Dr Kennedy:  Undermined, we could say undermined instead.

Q 292

Barry Gardiner: The most recent DECC impact assessment concludes that it is possible to reach the 50 grams of CO2 per kWh figure by 2030 with the Bill as it stands. Is DECC’s modelling of the effects of a significant increase in the carbon price up to 2030 accurate, and is it reasonable to expect a significant increase in that price and to achieve that figure?

Edward Leigh: You have 50 seconds to answer that question. Try your best.

Dr Kennedy:  The Government policy is that the carbon price will rise under the carbon price underpin, but whether it will depends on the political will behind that. Will we get forward with the investments that we need to meet the 2030 decarbonisation to either 50 or 100 grams? I think that we will get to 2020 because of the levy control framework, but it is highly uncertain whether we will get beyond that. I hope we do, because it is a sensible thing to do for our economy.

Edward Leigh: Our time has run out. Thank you very much, Dr Kennedy.

Examination of Witnesses

Doug Parr and Dave Timms gave evidence.

Edward Leigh: We now move to this morning’s second evidence session. For the record, would you please introduce yourselves?

Doug Parr:  My name is Doug Parr. I am the policy director at Greenpeace in the UK.

Dave Timms:  Good morning. My name is Dave Timms. I am energy campaigner at Friends of the Earth.

Q 293

John Hayes: Gentlemen, thank you for coming. What do you welcome most about the Bill? Where have the Government got it right?

Doug Parr:  I think that the aims of the Bill are right, with one exception. The opportunity for business and for the economy through the transformation of our energy system is not explicit, and it should be. It is right to say that we need a flexibility mechanism. I am not specifically signing up on the capacity market, but it is right to say that we need a flexibility mechanism and we need a support mechanism that contains the cost to consumers. The EPS is, in the first instance, doing an important job, which is to rule out unabated coal. So there are some things about the Bill that are good.

Dave Timms:  It is also right that we have taken the opportunity to get rid of the renewables obligation, which was past its sell-by date. It has done a job of work, but it has always been a second-rate policy and unfortunately we have replaced it with another second-rate policy in the shape of the contracts for difference instead of a proper fixed feed-in tariff.

Q 294

John Hayes: So on CFDs for example, particularly given the change we made to make them more easily accessed by renewables companies, you feel that the Bill has made progress from its draft stage to its final stage.

Dave Timms:  It is clearly an improvement to deal with the counterparty issue. It was obvious from the evidence that was given to the ECC Committee during pre-legislative scrutiny that it would almost be dead on its feet if that had not been dealt with across the board from all investors. However, that is improving a substandard policy. It has always been our position, and I have argued this with a lot of people in this room for the past eight years, that the UK should have gone with a fixed feed-in tariff along the German lines about a decade ago, and not continued with the renewables obligation.
It is interesting that some of the earlier modelling that was done by DECC in the early stages of the discussion on EMR showed a fixed feed-in tariff as being neck and neck with the contracts for difference, yet mysteriously, later on, the fixed feed-in tariff proposal was dropped, allowing the Department to judge CFDs against the vastly inferior premium feed-in tariff. So yet again the Government have dropped what would have been the optimal policy in favour of something which, while it has improved, still has enormous investor risk attached to it, and still does not offer a proper solution for independent generators, which should be contributing an enormous amount of the investment capital towards meeting our decarbonisation of the sector.

Q 295

John Hayes: I hear what you say about feed-in tariffs but, in essence, the Bill supports the idea of a mixed economy of generation. In terms of balancing energy security against our ambitions in respect of carbon emissions, that is the right strategy, is it not?

Dave Timms:  I do not think it does provide a mixed economy: what it provides is domination of renewable power by the current energy market. It shuts out those organisations, companies and communities we need to deliver a huge proportion of the investment to decarbonise the sector. It has been said time and time again that the utilities cannot deliver the necessary investment; they are leveraged up to the hilt. We need to bring in new players. Virtually every member of this Committee at some point has made a statement about how keen they are to open up this market and how important it is to bring in new sources of investment. This Bill, with CFDs, will not do that, unless it is altered by the Committee.

Edward Leigh: I have made absolutely no statements at all. I am completely neutral.

Q 296

Graham Jones: My question follows on from that, and you have partly answered it. The Minister asked where the Bill is strong, and I was going to ask where you think it can be improved and whether you think it is going in the right direction.

Doug Parr:  Let me just add to what has been said. It is rather strange that the Bill increases the level of state intervention at the generation end. We know from various statements on tariff reform that there is going to be an increase in state intervention at the consumer end—not with bad objectives—and that is just a fact. As for the whipping boys of the energy debate—the big six—the lack of intervention on the actual trading arrangements means that the vertical integration that has been characterised by dissatisfaction among a lot of people is not going to be affected. The evolution of the big six is a natural evolution of risk management around those trading arrangements, which remain fundamentally untouched.

Q 297

Robert Smith: I should remind the Committee of my entry in the Register of Members’ Financial Interests relating to oil and gas, and particularly my shareholding in Shell. On the criticism of CFDs, do you not think, though, that they help to balance the risk between investor and consumer, and help to protect the consumer from paying too much?

Dave Timms:  I do not think they would do that as well as a fixed feed-in tariff, which would contain within it the process of degression, as a well-established principle. Like the renewables obligation, the CFD does not actually contain that, so we are dependent on a negotiation of prices to drive them down. A much better deal for the consumer would be to have a fixed feed-in tariff that sets out in advance what is going to happen to those tariffs over a period of time. We have seen that work very successfully with the existing small-scale feed-in tariff.

Q 298

Gregory Barker: I would point out that degression in feed-in tariffs is not retrospective; it works only when it is applied, so you might want to reflect on your answer. Also, Mr Timms, I absolutely share your enthusiasm, passion and analysis regarding the need for more community-end distributed energy as part of the energy mix to challenge the big six, but I think you are confusing that with the need for a large-scale, unprecedented investment in offshore wind. Community energy is not an answer to deploying offshore wind, which often has a minimum ticket price of £1 billion. Even the most enthusiastic big society proponent—

Edward Leigh: We need to get on to the next issue.

Gregory Barker: Are you not confusing the issues of attracting at-scale investment in offshore wind with the need, possibly through a separate mechanism, to drive the take-up and deployment of community solutions?

Dave Timms:  I am willing to concede that the CFD works better for offshore wind than it does for small-scale communities and independent generators. Let us not forget that a significant proportion of the investment in offshore wind will come from independents, not just from the utilities. So yes, I am willing to accept that the shortfall in the CFD, at that larger scale, is less of a problem than it is at a smaller scale. But let me be absolutely clear: for communities, the CFD is a non-starter. It will be a disaster. They cannot deal with complexity, in no way are they going to set up trading arms, and they cannot post the collateral, which could run into hundreds of millions of pounds. That is the smaller part. We also have the independents.
It seems that there are two possible solutions to the problems being put by Co-operatives UK and people like David Handley to this Committee. One is that we go for a very significant increase in the current threshold for the fixed feed-in tariff. Our preference would be to take it up to 100 MW. That will provide a safe harbour for independents and communities. The other proposal that seems to be on the table is for a green power auction market, which David Handley calls the “short-term auction market”. That would mean that we took the actual price that was earned in that auction and made that the reference price. That would not leave independent generators at the mercy of discounted PPAs.

Edward Leigh: I will stop you there because other people want to come in.

Q 299

Ian Lavery: What are your views on the setting of a decarbonisation target for the power sector? Should it be in the Bill? Should it not be in the Bill? The Government have suggested that perhaps it would be in secondary legislation. Does that alleviate any concern you may have?

Doug Parr:  For reasons that the Committee heard earlier and in previous sessions, we believe that the decarbonisation target should be in the Bill and it should be 50 grams per kWh as an overall carbon intensity target. The reasons have, to some extent, been rehearsed, and I do not want to go over them again. It is about giving supply-chain investors certainty, because that is the key audience for this. It is about ensuring that the business benefits and the economic benefits come our way. It is about making sure that the undermining of the consensus around the delivery of the Climate Change Act, which has become very evident over recent months, is countered.

Q 300

Michael Weir: The important part about CFDs is how the strike price is set. Eventually, it will be set by the market, but initially, perhaps for obvious reasons, administratively and, in the case of nuclear, by negotiation with the developers. Do you have any views on whether that is appropriate and whether it will provide value for money for the consumer?

Doug Parr:  Yes, sure. On the point about nuclear, first: it is fairly clear that a lot of this—the whole package—was being designed in order to build nuclear power stations. We are now at a stage where it is actually very difficult to know whether we are going to get value for money, because the negotiations are going on behind closed doors and there are provisions deep in the schedules that allow quite a lot of the information to remain secret in those contracts, even when they are laid before Parliament. Even casting aside for a moment our reservations about nuclear more generally, it will be incredibly hard to know whether it represents value for money, because there could easily be money on the public balance sheet that is not actually laid before Parliament. That is clear from some of the detailed clauses.
In terms of administrative price setting, I think there is a mechanism that could essentially be borrowed from the renewables obligation, which is evidence-gathering and independent expert appraisal. That would give a reasonably good outcome. There might be a benefit in moving to auctioning within technology bands later in the process, but I think it would be quite dangerous to put a time scale on that now.

Dave Timms:  I think the evidence says that auctions provide an additional level of risk, as well, for developers. The risk is that somebody goes into auction and they do not come out with a CFD, having invested a considerable amount of money in developing a project.

Q 301

Barry Gardiner: The Tyndall Centre has produced a report that suggests that as much as £19 billion to £31 billion of investment in renewables could be diverted with the development of shale gas. Would you please comment on whether you believe that the current levy framework up to 2020, which as we heard from Dr Kennedy is very welcome, took account of the current situation only or of a prospective development of shale gas? What would be the impact long term of that, particularly if we did not have intensity targets in the Bill?

Doug Parr:  Okay. Let us just comment on the overall proposition on shale gas. The worry immediately around shale gas is not, is it going to be developed or is it not going to be developed, and how much is there going to be, because frankly no one has any idea. The worry about shale gas is that it is being used as a kind of promise, as a fairy that will come in and make gas cheap and abundant, when we have absolutely no idea, and that will change policy as a consequence. That is what I am most worried about at the moment, that we will be going down a gas route—as exemplified by the gas generation strategy—undermining the low-carbon agenda and the most cost-effective way of delivering on our Climate Change Act targets, as laid out by the Committee on Climate Change, because of this fairy called shale gas. So there is a direct threat to the low-carbon agenda, not from shale gas itself, physically, but from the way in which it is being treated in political terms.

Q 302

Barry Gardiner: I understand your argument about it being hypothetical jam tomorrow, but I would specifically like you to address what you believe the impact might be on the diversion of investment funds, which the Tyndall Centre has talked about. It strikes me that between £19 billion and £31 billion coming out of investment in renewables is really quite substantial, as is the impact that that would then have.

Doug Parr:  I agree; that is a very substantial amount of money. I have not seen the report so I cannot comment on the detail or the methodology. The Tyndall is a respected institute and if it is coming up with numbers like that, one suspects—

Q 303

Barry Gardiner: Could you perhaps, after you have read the report, write to us with your views on it?

Doug Parr:  Yes, I will look that out and send a note.

Q 304

Phillip Lee: In the context of the economics of decarbonisation, would you agree that the need for a gas-generation strategy has been brought about—indeed, reinforced—by an absence of a coherent nuclear strategy for the past 10 to 15 years?

Doug Parr:  No. A well positioned gas-generation strategy would be focusing on the need for flexibility in the electricity system, for which there is a need. It is quite possible that we will need certain amounts of new gas.

Q 305

Phillip Lee: But you would agree that to hit 2050 targets we have to have significant nuclear power as part of that.

Doug Parr:  I would not agree with that, no.

Q 306

Phillip Lee: So you disagree with David MacKay’s 2050 calculator.

Dave Timms:  No, we would not. I can send this to you if you want, but my colleague, Simon Bullock, has run publicly available scenarios using the DECC 2050 calculator that do not involve new nuclear power stations and that do keep the lights on and allow us to hit 50 grams.

Q 307

Phillip Lee: But the cost implications of that to the consumer are what?

Dave Timms:  The DECC 2050 pathway calculator does not tell you what the cost implications are. You are also making an assumption that nuclear is significantly cheaper than offshore wind, and I do not see the case that it is.

Q 308

Phillip Lee: I am asking you what the cost implications of your plan not to use nuclear by 2050 are to the consumer.

Dave Timms:  The DECC 2050 pathway does not allow you to calculate the cost. I do not see that—

Q 309

Phillip Lee: No, I am asking you what your plan is, which seems miraculously to avoid using nuclear but does not seem to have an impact on consumer bills. Hitting a 50 gram target—

Dave Timms:  I did not say that it would not have any impact on consumer bills; I said that I do not see that there is any evidence that—

Phillip Lee: But back here in the real world, sir, the impact on consumers—

Edward Leigh: We do not want a general argument about nuclear power. Let us concentrate on the Bill, with a specific question.

Q 310

Phillip Lee: With respect, Chair, this is about decarbonisation of the electricity market.

Dave Timms:  You asked whether we could do it with the DECC 2050 calculator, and the answer is that we can, we have done and I can send it to you, if you would like to see it. There is a different question about the cost of getting to 2050. Obviously, those costs will be slightly different depending on what the mix is, what the policies are and what happens in the outside world.

Doug Parr:  I think there are some real imponderables about cost. Let us remember that the Government decision to be in favour of nuclear power, which was as a result of the 2007 White Paper, suggested that an EPR light reactor would cost about £2 billion.

Q 311

Phillip Lee: I have not talked about individual technologies.

Doug Parr:  No, and I am not talking about individual technologies except inasmuch as the costs for nuclear seem to have escalated by something like 300% in about six years.

Q 312

Phillip Lee: The purpose of my question is that the need for gas-generation strategy is there economically, and it is there because we have not had a coherent strategy on any other low-carbon form of electricity, and the major one would be nuclear. That is my point. On your criticism of the gas-generation strategy, our need for it has been created by the fact that we have not had any coherence in energy policy in this country for many a year.

Doug Parr:  There is a need for an understanding that we are moving to a different kind of system, which should be more interconnected and flexible and have more investment in long-term options such as storage. That would allow a greater level of intermittent renewables on to the system and connection with our European colleagues.

Edward Leigh: Let us carry on now and let us stick strictly to the Bill. This is a Bill Committee.

Q 313

Alan Whitehead: On the subject of alternative ways of managing either demand side response, through storage, interconnectors and so on, or demand side reduction, through taking capacity out of the system, how do you see the capacity market arrangements, as presently set out, impacting on that? Do you think that such measures, which everyone agrees ought to be in or around the Bill, should be under contracts for difference or capacity mechanisms?

Dave Timms:  There is quite a lot to cover in that. The first thing is possibly to start with the capacity mechanism. It is the case that the Department of Energy and Climate Change has taken on some of the criticisms that were made by us and by the Energy and Climate Change Committee at pre-legislative scrutiny. We argued that forcing demand-side response and storage technologies to compete against existing and new fossil fuel capacity would be unfair. They would not be able to compete. That view was based on evidence from the systems operating in the States, where 70% of payments coming out of the PJM Interconnection auction are going to existing high fossil fuel capacity. They are starting to bring demand side and storage forward, but not in significant quantities compared with the subsidy there for any existing fossil fuel plant.
That is starting to be recognised and the Department is planning to run bespoke auctions as a pilot project for demand-side response and storage, but that is insufficient. It should be a permanent feature of the Bill, and it would be interesting to look at how the Bill can be amended to ensure that we have separate auctions for demand side and storage. In order to get those things, which we know are an essential part of our future electricity system, we have to open the door to a general auction that would overwhelmingly go to high fossil fuel capacity. That is a mistake. We need to be able to bring such things forward. We should reverse the assumption. We should be developing demand-side response, storage and interconnectors first. There is no strategy for interconnectors. There is nothing in the Bill that will help interconnectors. Our electricity system is the least interconnected in Europe for its size, but we are doing nothing about it.
Ofgem’s recent capacity assessment, which says that we are going to go down to a lower level of excess capacity in 2016, includes no assessment at all of the provision that could be made and the help that could come from demand-side response and storage. However, studies show that we could get 7 GW of demand-side response from the domestic and non-domestic sector. Ofgem is not strong enough in its support of those technologies and it is also bolted to what I think is the wrong mechanism for dealing with future flexibility, which is the capacity market. I know that you have commented on this and I am entirely in agreement that the strategic reserve option, which performed better in DECC’s modelling, has been rejected on qualitative grounds, which do not stand up to any scrutiny and can be guarded against, which is the slippery-slope argument. That does not stand up to scrutiny. The Department is making the wrong decision and is backing us into a policy that can provide windfalls for existing fossil fuel capacity.

Q 314

Laura Sandys: I am interested in picking up on those points. I respect the Chairman’s view that we must stick to the Bill, but the Bill is in the context of many wider policy areas, not least the consultation on demand reduction. I am sure you have both responded to that. Sometimes policies might not need to be in legislation. They can be framed in quite different ways. The Bill is designed around low-carbon technologies and when the other pieces of policy from green deal, from demand reduction come together as policies on the demand side as well as supply, they are a very strong commitment to a decarbonised and reducing energy consumption agenda.

Dave Timms:  What is really interesting about the consultation, which I have not responded to, because I was swotting up for this Committee, is that it shows that there is a considerable amount of reduction potential within the non-domestic sector and the industrial sector, which we do not currently have the policies in place to meet. It is a good consultation. We have a number of options that we could pursue. So we could pursue an energy efficiency feed-in tariff. Some people have made a very good case for that. We could have a targeted de-deployment or scrappage scheme. The important thing for this Bill is that we do not lose the opportunity to put in place the powers to bring forward those schemes if the consultation decides we need them. That would be a really big mistake.

Q 315

Laura Sandys: Absolutely, but it is the consultation that will deliver the responses from wonderful organisations like yourselves to ensure that the policy is implemented. Is it a legislative solution, is it a policy solution? There are all sorts of different variations. It is close to the deadline as a consultation.

Dave Timms:  There is not a silver bullet. We think that there is going to be a mixture of standards, incentives and additional spending through recycling things like the carbon tax revenue to enable us to invest in these policies.

Q 316

Laura Sandys: But you would recognise that the Government have a very clear determination to address the demand reduction potential? Dave Timms: We absolutely take the intent of the consultation at face value.

Doug Parr:  It is very welcome that DECC now seems to have some genuine commitment to trying to make demand reduction happen. After many years on this beat, I think that is welcome. The two things I would say is that it would be great if the demand reduction policy did not isolate electricity completely from other considerations. So, for example, electricity demand reduction can be achieved through reduced air conditioning, which is about building shell, which overlaps with the green deal. There are significant gains to be got from the gas that we need to burn through supply-side efficiencies with combined heat and power. Of course it is welcome. What I do not want to see is a silo mentality which rules out some of the options that are there for co-operation or interlinking between policies that would be beneficial.

Dave Timms:  It would also be helped an awful lot if the consultation which the Department has brought out was not being undermined simultaneously by the actions of the Department for Communities and Local Government, which seems to be doing as little as possible to help the Department implement things like energy performance certificates or display energy certificates, which could significantly help in bringing down the electricity needs within the commercial and the domestic sector.

Q 317

Laura Sandys: But do you recognise that the Government have proposed a huge number of different policies and different measures that address these things for the very first time?

Dave Timms:  I recognise that there are a lot of ideas, that there is a commitment to bringing forward measures if the consultation comes up with them and that we have moved forward in a number of areas. But we have some very serious problems of implementation and there are some significant gaps in areas like the industrial sector and the commercial sector. How the Government go ahead and implement things like the minimum standard on the private rented sector over the next year, for example, will be a key indicator of whether what we are doing is coming up with new policy ideas in consultations, while failing to implement the existing ones and getting anything out of them.

Q 318

Peter Aldous: Notwithstanding, Mr Timms’s concerns about renewable obligations and contracts for difference, we are where we are. I would just welcome your views on the transitional arrangements relating to the renewable obligation. Are you satisfied with the 2017 closure date for the renewables obligation?

Doug Parr:  There is a case to be made for increasing the overlap period between 2014, when CFDs will hopefully come into operation, and the 2017 period. The people whom we speak to are already talking about a drop-off and a potential long-term pipeline. It seems that the optionality for developers of having some confidence in the existing arrangements, which they know and trust, for projects that might already be starting to enter into the development pipeline in the post-2017 period would be wise.

Q 319

Dan Byles: I am just coming back to the 2030 decarbonisation target, which is becoming one of the big issues for discussion. Why do you think it so important for the UK to have a 2030 decarbonisation target, when no other EU country has one? In fact, Germany, which already has higher emissions per capita than we do, is building 20 GW of new coal.

Dave Timms:  It is UK solution to a UK problem. Germany, Denmark and other countries have big developed supply chains. We do not have their supply chains. We need their supply chains, if we are going to bring home the benefit of a low-carbon economy.

Q 320

Dan Byles: Did they develop those supply chains as a result of, for example, the 2030 decarbonisation target or have they demonstrated that we do not necessarily need that in primary legislation?

Dave Timms:  In Germany’s case, they developed it through long-term certainty around the commitment to a fixed feed-in tariff, something that I have been advocating. As David Kennedy said, this is about addressing a situation that is presented to us by a set of circumstances in the UK, which is the fact that we have created enormous political uncertainty around this agenda and the fact that we do not have a supply chain. We are seeing investment decisions being made now by companies like Vestas and Siemens around manufacturing facilities in this country or not, and we need to address that.
We did not invent the idea of having a decarbonisation target in the Bill. It came from the Committee on Climate Change and supply chain companies, which you have seen reiterated time and time again in front of this Committee. Whether other countries have the policy or not seems to be irrelevant. We need it here.

Doug Parr:  We have no right to succeed on some of these technologies, where we have a global lead. There is a lot of interest in the offshore wind industry from around the place, not just in Europe. Japan is, of course, getting more interested in it. The US is starting to think about licences. As for the tidal stream industry, which again we are apparently a global leader in, Korea is putting quite a lot of money into this area. As Lord Deben said the other day, “This is about opportunity”.

Q 321

Dan Byles: Do any of those countries that you have just mentioned have written into primary legislation something equivalent to a 2030 decarbonisation target? Every time you mention another country, you are demonstrating to me the fact that we do not need this in primary legislation because other countries are managing to do it through other methods.

Doug Parr:  What those countries have got, and perhaps had a lot more of a year ago, is a consensus across society that that is the direction of travel. That is certainly true in Korea.

Dan Byles: Has any part of the Climate Change Act been changed by the coalition agreement? The only people who seem to think that there is a crisis in investor confidence seem to be people like yourself. On Tuesday, E.ON, National Grid, Centrica and Scottish Power sat in front of us and said that they were ambivalent—

Doug Parr:  They probably do. Look at the business model of people saying that that is not a problem. They are the vertically integrated utilities. This business model is about trading between different portfolios of supply, and that is how they make their money. They do not care whether there is a decarbonisation target or not.
As for saying that those are energy companies, it is a different set of investors from the one that the decarbonisation target is really aimed at. It is about securing the benefits for those people who are making stuff, like Siemens, like Vestas, like Samsung, like Mitsubishi and like Gamesa, all of which are actively considering or actually in the process of making decisions about whether to invest in the UK. It is our manufacturing industry that benefits from that.

Q 322

Luciana Berger: How would both the panellists change the Bill to allow independent generators to compete in the market? What are your views on a pool to ensure proper competition and generation?

Doug Parr:  What I think is required, assuming that we stick with the CFD arrangement, is that there are changes that allow for or, at this moment, do not exclude the possibility of introducing a green power auction market. If you are asking me for specific amendments, I can get back to the Committee on that. My understanding from those who have been developing the idea is that they are not substantive. They are not huge. The option to do it can be retained relatively straightforwardly because a lot of the institutional architecture is available in the non-fossil purchasing agency, which was set up in the ’90s in support of the existing renewal policy then.
I am sorry, your second question was?

Q 323

Luciana Berger: It was about a pool.

Doug Parr:  I think that there is much to commend the idea of a pool, for the reasons that I set out initially. We have vertically-integrated utilities, which, as a result of the risk management, are around the trading arrangements, and those trading arrangements are remaining unaltered. To increase the opportunities for independent generators, of which we will need a considerable amount if we look at the amount of money that needs to be invested and we look at how overstretched utilities are in terms of their balance sheets, a pool would give us the opportunity to make that a more competitive market, increasing liquidity and, hopefully, increasing investment as well.

Dave Timms:  I agree with everything that Doug has said but, just to add to that, what we have to do is talk slightly differently between independent generators, which operate at a slightly bigger level, and communities. I think that, regardless of what we do, community schemes—5 MW, 10 MW, 15 MW, 20 MW—as Nigel Cornwall said on Tuesday, are not going to be able to engage in those trading arrangements. While there may be a solution for independent generators which will be helped by the pool and the green power auction market, for communities I cannot see that anything other than an increase in the feed-in tariff will do.

Q 324

Tom Greatrex: Earlier, Mr Timms, I think that you said that you would like the threshold increased to 100 MW. Did I hear you correctly?

Dave Timms:  What I was saying is that I think there are two possibilities to deal with the problems of CFDs for independent generators: either we go for a green power auction market along the lines that Doug suggested and people like David Handley from RES have outlined, or we very significantly increase the feed-in tariff up to 100 MW. If we go for a green power auction market, we would still need to increase the feed-in tariff threshold because that auction market, while it may work for independents, will not be accessible to communities who simply cannot deal with the complexity of trading arrangements. As Nigel Cornwall said—he has written a paper on this for Co-operatives UK, looking really at 20 MW—simply increasing the feed-in tariff to, say, 20 MW would not deal with the problems faced by the independents who will be operating in a scale above that.

Q 325

Mel Stride: May I turn to consumers for a moment? The Government are extremely keen that we keep bills as low as possible. One of the few axiomatic elements of economics seems to be that if you apply a restriction to a market, that almost certainly leads to an increase in price. What are the arguments that you would employ to suggest that a 2030 decarbonisation target would not have the ultimate effect of increasing prices for the consumer?

Dave Timms:  I am not sure how it would be a restriction on a market. What we would be doing is sending a signal to companies, who are making supply-chain decisions, that they should invest here. Obviously, somebody has got a much better chance of paying their energy bill if they have a job working for a turbine manufacturer or something. So I am not sure that I understand your point—how would it restrict the market?

Q 326

Mel Stride: Simply that if you start to impose targets that a market has to adhere to, it has to change its behaviour in a way that it might not otherwise have done. That mechanism in itself tends to drive price and cost upwards, not downwards.

Doug Parr:  If you look at the low-carbon forms of generation, they tend to be capital-intensive, so interest repayments and ability to borrow are an important part of the overall costs. Indeed, a lot of the EMR impact analysis in the first instance was looking at what the impacts are of the various policy options and how we can bring down the cost of borrowing. It seems to me that a target of that kind gives much more clarity to the low-carbon generation sector that that is the direction of travel, and therefore reduces the interest costs and the cost of set-up in terms of the individual developments. That is the conclusion that the Crown Estate report, which looked at offshore wind, came to.
Yes, we should of course be concerned about bills, and we are, but I emphasise again the wider economic benefits of going in this direction. Our own analysis, which was done for Cambridge Econometrics, demonstrates that an offshore wind-based strategy rather than a gas-based strategy in the period up to 2030 has a very small impact on bills of around 1%, but it leads to a 0.8% growth in GDP and about 100,000 additional jobs in the energy sector.
So, even taking the most extreme example of renewable power costs in the offshore wind area, compared with a gas-based strategy with a carbon price of the Treasury’s choosing, we end up with a very small impact on bills and a very useful and important impact on GDP.

Q 327

Mel Stride: So a 2030 target would have no risk whatsoever of increased consumer bills, in your opinion?

Doug Parr:  We cannot say that. The amendments on the 2030 decarb that we are attempting to draw up—there always have to be two principles. One is the principle of certainty, and the other is the principle of flexibility. We know it is a political reality that any amount of cost is not sustainable. For the reasons that have been laid out by the Committee on Climate Change, however, namely that the pathway of electricity decarbonisation and using that electricity in other sectors is the most cost-effective way of doing it, I have not seen any challenge to that. That is what makes the electricity sector special in that regard, and that is why a target for the sector is important.

Q 328

Mel Stride: Have you made any assessment of what effect your proposed target of 50 grams/kWh would have on consumer bills?

Dave Timms:  It is not our proposed target: it was proposed by the Committee on Climate Change.

Mel Stride: Sorry—on that target.

Dave Timms:  One has to distinguish whether we are saying the difference between having a target and doing it without a target. It will be cheaper to do it with a target than it will be to achieve the same thing by accident.

Q 329

Ian Lavery: The Government announced just before Christmas the potential for bringing 30 new gas-fired power stations unabated online. What impact do you think that will have on the Government’s ability to achieve their long-term climate change targets?

Dave Timms:  That is entirely dependent on how the power stations are run, because it depends on the load factor that they are run at. The danger is that what we have with the Bill is almost a perfect storm for us not to be able to meet our climate change targets. If we combine an emissions performance standard that is too weak and does not rule out unabated gas; a market-wide capacity market, which could reward all capacity, including existing fossil fuel capacity; and the lack of a decarbonisation target, that provides the strong possibility that we could not only bring a large amount of unabated gas on to the system—we accept the need for unabated gas at 2030—but that we would then be able to run it at load factors that would bust our carbon targets.
So you can have all sorts of different permutations of the amount of gas on the system, but it just depends how much you run it. At the moment, we have no guarantee that we will not be bringing forward large numbers of unnecessary gas-fired power stations that will be run at a level that will bust our carbon targets.

Edward Leigh: We have only got a few minutes left. Very quickly, Barry Gardiner.

Q 330

Barry Gardiner: Mr Timms, on that level of unabated gas by 2030, David Kennedy has suggested that its role should be limited to balancing the system at that point.

Edward Leigh: I am going to stop you there. Very quick answer, and then I am going to let Sir Robert come in, because he has not had a go yet.

Dave Timms:  Yes, we agree. The role of gas in the future is to fill in the gaps around renewables.

Q 331

Robert Smith: I just wanted to get your views on the £7.6 billion levy control framework 2020, and whether you felt that was pitched about right.

Doug Parr:  Difficult to say, because we do not know what the ask is going to be for the demand reduction measures, which are extremely important. We do not know what the portfolio is, and we do not know how offshore wind—we are assuming that the costs are going to come down, as per Crown Estate. It is a bit hard to say whether it is completely adequate to the job. It is better than it might have been, but it will not necessarily completely fulfil the need.

Dave Timms:  It is a big step forward to have that figure agreed. Whether it is adequate or not will depend on the decisions that are taken around things like CFDs and whether we shut out independent generators, which will provide mostly investment. Ironically, we could find ourselves in the situation where it is more than adequate because we are not bringing forward the investors to take up the CFDs, because we have shut most of the market out.

Edward Leigh: That brings us to the end of the time allotted by the Committee. I thank our witnesses.

Committee adjourned (Programme Order,15 January) till this day at Two o’clock.